Cramer: Lebed's Fraud

The Feds got sandbagged big time in that New York Times Sunday magazine cover story on Jonathan Lebed, the teenage day-trader who got nabbed by the Securities and Exchange Commission for pumping and dumping.

If you didn't read it, a quick summary of the story is in order. Michael Lewis, of Liar's Poker fame, wrote a viciously cynical piece that argued that, because Mary Meeker and Henry Blodget and everybody else were so wrong about stocks but made a fortune, why can't Jonathan Lebed, who made money for people, get away with writing what he wants about stocks and make a fortune, even if it turned out not to be true.

In other words, why can't Lebed have the freedom to do whatever the heck he wants and why are the Feds picking on him?

The subtext was even worse: The Feds knew they had a bad case and they didn't even coordinate it. Lewis implied that aging Securities and Exchange Commission Chairman Arthur Levitt didn't know what the heck was going on, and when asked about it, he made stuff up.

Predicted Stuff He Didn’t Know

OK, you may have read it as less damning for the Feds and more positive about Lebed. I know you couldn't have read it as that the Feds did their job and that Lebed was a bad pump-and-dumper. Yet that's what really happened. Jonathan Lebed bought stocks, went on message boards, predicted stuff he didn't know and blew the stocks out into his predictions.

Henry Blodget at Merrill Lynch went out to his sales force and predicted stuff he didn't know and some of it happened and some of it didn't. In Lewis' opinion, the Feds would have done better going after Blodget. Or shutting up entirely.

I don't live in Lewis' world. I live in a world where people pump and dump all of the time. I live in a world where I have been investigated by the Feds for pumping and dumping and I never even dumped! And the Feds were right to investigate.

Let's understand why the Feds exist. First, nobody disputes the right of people to say whatever the heck they want. That's because of the First Amendment. But you also can't dispute the right of the Feds to regulate in order to protect other interests, notably the right for people to buy and sell stocks without being scammed.

That right can, at times, trump the First Amendment. It did in Lebed's case.

We Have Laws in This Country

We have laws in this country against getting long and loud and making stuff up and dumping it into the hoopla you created. Arguably these laws aren't easily enforced. Arguably these laws are a bit Pollyanna-ish. People come on television all of the time and do this. We know it. That doesn't make it right. It doesn't mean that the Feds shouldn't investigate it because it is "too prevalent." It just means that the Feds try to pick their spots and stop as much pumping and dumping as they can.

The Feds, in this case, called Lebed in and tried, in their own cumbersome way, to get the kid to stop. Their way is to grill. The kid didn't get scared by it. Glory be, more power to him. I debated committing suicide — as everyone close to me knows — when the Feds called me, because I was so mortified and embarrassed. Hey, maybe I am smarter. Maybe Lebed has better drugs. Maybe we should all think that when the Feds call they are a bunch of jerks, like we are the Sopranos or something.

But at some level, the federal government — yeah, the guys who still wear the cheap suits and have that kind of TJ-Maxx-sport-coat look about them — deserve our respect and our obedience. They represent the will of the people, which is to try to do their best to keep me from stealing from you using securities.

Like a Bunch of Jokers Pursuing a Good Kid

The real tragedy here is that the Feds didn't simply say, "Lebed was a habitual pumper and dumper and we will pursue pumping and dumping whether it is found at the Baddda Bing Club where they peddle Wobistics, or online where they peddle small-cap nonsense." That would have ended it for me and probably for you, too.

Instead, they came off like a bunch of jokers pursuing a good kid and a money maker. That makes me want to puke.

Pumping and dumping is wrong wherever it is done. That's common sense and the law. If you violate it, you better expect the Feds will come calling. When they do, you should stop your behavior or pay the price — not get a magazine article about you in your defense that makes your opponents look like Keystone Knuckleheads.

In the Lebed case the good guys won. Don't ever forget that.

James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for the network of TSC sites and serves as an adviser to the company’s CEO.